Exam 3

Accounting Considerations

- Asset impairments - Exit or disposal activities - Fair value measurement - Hedge accounting - Debt modifications and loan covenants - Foreign currency matters - intercompany transactions of a long-term investment nature - Revenue recognition - Insurance recoveries - Future operating losses - Compensation - Income taxes - Government assistance

How does the auditor test the accuracy of inventory?

- By comparing the client's records to the inventory count observed - Any unreconciled differences between the client's records and the inventory count should be adjusted by the client

BAA: EY video

- It's not easy to keep and accurate count - The ranchers had a rope to help count - They would knot it every time they reached a count of 100 - They would then count the knots - This is hard! - Imagine counting for an hour counting more than 3,000 sheep!

Financial Statement Disclosures

- Loss contingencies - Risks and uncertainties - Going concern - Subsequent events

Steps to Complete Work Paper

1. Fill in the Section and Head Count per Pen Sheet info 2. Provide a final count using the machine learning software and based on our training to date 3. Review the formula in the initial difference column - Be careful to make sure you appropriately assign a positive or a negative value to any changes to indicate if the change clears a discrepancy or adds to it. - Attempt to reconcile the initial differences found utilizing all available information, and the Appendix A-E info --> Update the Reconciling items --> Provide an explanation for any change that you made as a result of your reconciliation and include any supporting documents 4. Review the formulas in the final reconciled difference - Provide questions for the GM that you might have for follow-up w/ the WDB GM when this number is significantly different than zero 5. Include the Auditor's initials that is responsible for this row and the Auditor that reviewed this row - Each row must have a different auditor performing each role to ensure audit quality

On the related D2L thread, please pick one of the Financial Statement Disclosures addressed in the Technical Bulletin that you feel investors are the MOST CONCERNED with assurance providers addressing accurately. First, (1.) explain specifically why you picked this financial statement disclosure and why you anticipate this to be more of a concern to investors relative to the other financial statement disclosures in the technical bulletin. Then, (2.) for this same financial statement disclosure, suggest which types of clients this financial statement disclosure may be the MOST and LEAST concerning to investors. In doing so, explain your rationale. Please target the length of your response to be between 6 - 10 sentences.

1. I think the financial statement disclosure that investors are most concerned with assurance providers addressing accurately is going concern. I chose this disclosure because I think the pandemic has put a lot of stress on business' continuity and the going concern disclosure helps investors understand how the company has been impacted and its future. I think this will be more of a concern to investors relative to other disclosures because it focuses on any substantial doubts that may exist about the client's ability to continue operations. 2. This disclosure may be the most concerning to investors of manufacturing clients, because the pandemic may have required them to shut down for a significant period or they have lost contracts with suppliers and customers, etc. The going concern disclosure could be least concerning to investors of clients in the entertainment industry. I think as things get back to normal and people go out more these business' will be able to generate a profit.

On the related D2L thread, please pick one of the Accounting Considerations addressed in the Technical Bulletin that you feel will be the MOST CHALLENGING for assurance providers to address accurately. First, (1.) explain specifically why you picked this accounting consideration and why you anticipate this to be more of a challenge relative to the other accounting considerations in the technical bulletin. Then, (2.) for this same accounting consideration, suggest which types of clients this accounting consideration may be the MOST and LEAST challenging to assess. In doing so, explain your rationale. Please target the length of your response to be between 6 - 10 sentences.

1. I think the most challenging accounting consideration for assurance providers to address accurately will be fair value measurement. I believe this is the most challenging because the pandemic may have caused transactions that are "not orderly" to occur. Companies may try to value an asset or liability based on its potential value at a future date rather than its current value, because they believe the transaction is not orderly; therefore, the fair value prices do not apply. I think that fair value measurement is more challenging relative to the other accounting considerations because it requires the use of judgement by companies, assurance providers, and the market. 2. I think the clients that will be the most challenging to assess are in the travel and hospitality industry (i.e., airlines, cruises, and hotels) . Due to the significance and duration of COVID-19, I think these companies will need to record impairments which will require fair value measurement. I think the clients that will be the least challenging to assess are companies who have closed due to the pandemic, such as movie theaters, restaurants, and retail stores. Due to businesses in these industries participating in a distressed sale or forced liquidation fair value measurement is not necessary.

Seven-Step Analytics Approach

1. Understand what each question asks (e.g., does the Actual Pen cattle = the Head Count per the Pen Sheet?) 2. Develop an expectation considerate of the case's background and other info (e.g.., the Pen Sheet) 3. Use the CountThings Tool to count the actual cattle from images dated May 1, XX. (Pen Sheet as of April 15, XX) 4. Compare expectations from step (2.) to actual cattle observations from step (3.) 5. Attempt to reconcile any differences. In doing so: 6. Document/provide sufficient appropriate audit evidence (e.g., "screen shots or snippings of actual counts" supporting your response; cite details in supporting documentation that may help w/ reconciliation, include Document Names, Dates, and Details w/ explanations) 7. Document any remaining questions or limitations (e.g., remaining questions to ask the GM; data quality issues, data you wish you had, etc.)

Ex. Write-up

1. What was the outcome of your audit of the WDB inventory for Part II. a. What was the Total Head count per Pen Sheet (Appendix A)? b. What was the Count Using Machine Learning Software? c. What was the initial difference? d. Of the initial difference, how much and percent were you able to reconcile? e. Finally, what is the count and percent variance of the unreconciled difference? 2. Should WDB make an audit adjustment based on the count using this innovative approach? Why or why not? 3. Only include your time counting (and not downloading images or software). How long did it take your group to count all of the cattle in the images in Working Paper - Part II? 4. Consider WDB's In-house inventory count, time and effort. How would you compare the effectiveness and efficiency of the traditional method of counting the cattle (from the video) to using the drones and automated counting software to perform the inventory count? Present a cost-benefit analysis of the manual sheep counting and technology-assisted sheep counting. 5. How can this innovative process be improved further to be even more efficient and more effective? Present your suggestions for process improvement and explain how you anticipate your recommendations will impact the process in terms of efficiency and effectiveness. 6. For which other types of inventory could auditors use drones or automated counting software to improve the effectiveness and efficiency of the audit? Explain your answer, and provide two examples. 7. The PCAOB is considering whether this innovative approach should be considered an acceptable method of counting Inventory. To this end, the PCAOB has asked for your feedback on whether drones and automated counting software should be viewed as complying with GAAS. Prepare a one page memo (single spaced) advising the PCAOB. The goal of this memo is to persuade the PCAOB to either adopt the drone technology and use of automated counting software as an acceptable audit methodology/ audit evidence or to continue using traditional audit methods. Use your results and experience with this case as evidence for your arguments. Include within this memo any suggestions for improving the process that you might have identified while performing the case study. Finally, make sure that your memo includes three pros to adopting this innovative audit methodology and three cons to adopting this innovative audit methodology.

PINC AIR video

90% of all inventory is stationary in the supply chain. However, every organization struggles with inventory accuracy in warehouses and stores. 90% of inventory checks are done manually with an average of 89%-99% inventory accuracy. Manual inventory checks are: - Repetitive - Time-consuming - Imprecise - Risky - Expensive Drones help with... - Inventory accuracy - Inventory location - Employee safety - Autonomous navigation - Collision avoidance system - Easy-to-use web application - Integration with any system - Real-time multi-item identification - Accomplish more 300x faster

What is a Drone?

A drone is an unmanned aircraft. Drones are formally known as unmanned aerial vehicles (UAVs) or unmanned aircraft systems (UASes). Essentially, a drone is a flying robot that can be remotely controlled or fly autonomously through software-controlled flight plans in their embedded systems, working in conjunction with onboard sensors and GPS. Moreover, drones can take pictures and videos from locations that might otherwise be too difficult or dangerous for a person to access.

Week 1: Accounting & Auditing

Are NOW dynamic, innovative, and technically driven professions where continuing professional development, often w/ new technology takes place daily

What is CountThings?

CountThings by Dynamic Ventures is a family of desktop and mobile applications that use computer vision to automate counting items from photos, in a wide-range of fields such as, industrial, manufacturing, medical, livestock, commercial, construction, agricultural, and timber. Each count must be reviewed and revised for accuracy. Users adjust the counting algorithm tools, as well as provide feedback on: - Items counted that should not have been counted (Type I Errors) - Items missed that should have been counted (Type II errors) Subsequently, the counting algorithm learns from this feedback and becomes more precise with each use. Thus, CountThings is an excellent example of machine learning software.

Does the use of Drones and Machine Learning Software comply with GAAS?

Current GAAS is silent as to whether such an approach satisfies the requirement for the auditor to be present at the time of an inventory count - There is no explicit reference to these technologies in the standard - It's unclear at best, and perhaps an argument can be made based on the spirit of the standard - In response to COVID, technologies such as DRONEs have been increasingly used Physical presence could be interpreted in many ways. - Are drones flown remotely through an automated means where a human presence is completely removed? Essentially, there is no answer at this time. - Additional or revised guidance is needed - Nonetheless, many major audit clients (e.g., Amazon, Wal-Mart) are using drones and machine learning software for inventory purposes *If an auditor has a client and inventory is material and they're not able to perform an inventory count what kind of opinion do they have to express? --> Disclaimer (scope limitation)

Test the Inventory at WDB

Drone Images Appendix details: pen sheets, special pen register, move log, maps, and internal audit report Working paper: reconcile your counts with the inventory records provided by the WDB GM

Investigating & Reconciling Differences

Even though this is a test of details, consider applying our Seven-Step analytics mindset when updating the Working Paper

Audit Quality & Reviewing the Work Paper

How groups plan to review their work in an efficient and effective manner? 1. Was the Auditor's count of the cattle correct? - Review the snipping. Do you see over or under identification errors that still need to be corrected? 2. Remember - The job of the Auditor is to AUDIT! The auditor does not "speculate, guess, or anything of the equivalent." Management is responsible for supporting their assertions. Is the audit evidence persuasive, and support/reconcile management's head count? - Is the explanation accurate, true, supported, and certain? If so, that's an appropriate reconciling item w/ an explanation. - Alternatively, "speculative/uncertain" attempts at explaining initial differences SHOULD NOT be part of the Reconciling Items, but may be questions to ask or facts to confirm w/ management. 3. Does the reviewer come to the same conclusion about the reconciled difference after reviewing the "counted image" and walking-through the explanation and reviewing the supporting documentation? - Does the audit documentation "stand-alone"? Alternatively, does the auditor need to "beef up" the documentation with details (e.g., Document Names, Dates, and other Details) to support the audit documentation

What does innovation in auditing and accounting means to you NOW?

I think innovation in auditing and accounting means being open to learning something new and applying it to your job to become more efficient and effective. Based on the video and the learning outcomes, important innovative skills to have include taking initiative, being adaptable, asking the "right" questions, and being able to get your point across.

Are you prepared to play a role within this, or a related industry that is investing trillions of dollars in blockchain, machine learning, and artificial intelligence?

I think this class has helped prepare me to take a larger role in Blockchain technology as an auditor. From this class, I now have a better understanding of how Blockchain works and how it could be used in the future. I think the SmartHomes audit of cash assignment enhanced my innovative mindset the most. I was able to perform each step in the audit program, determine if any misstatements occurred, and create adjusting journal entries for any misstatements found. The big-picture lesson that I learned is that auditors need to communicate clearly and effectively when performing audits. Any notes included in workpapers must explain what happened so an experienced auditor would be able to come to the same conclusion.

What is Machine Learning Software?

IBM defines machine learning as a form of AI (artificial intelligence) that enables a system to learn from data rather than through explicit programming. However, machine learning is not a simple process. As the algorithms ingest training data, it is then possible to produce more precise models based on that data by providing human feedback. Such feedback helps improve the precision of the predictive model.

Big Four Partner Email

Industries impacted the MOST: retail, hospitality, etc. Industries impacted the LEAST: technology The role of technology/invention in inventory observations: adapting to virtual conversations, adding seats to existing licenses, adding servers, purchasing laptops/monitors; streaming live video during the counts Impairment procedure challenges: Silver linings: deeper understanding of their clients business, technology allows us to work from home without many obstacles, gotten to know people and clients better

2. Should WDB make an audit adjustment based on the count using this innovative approach? Why or why not?

Internal auditor: advises on operational efficiencies and other types of advising, support the accurate and timely performance of financial reporting; not going to force management to do anything. not independent of management, will write-up a report and give it to management External auditor: dependent on materiality (based on $ amount, not units); dependent on management's responses to your follow-up questions

Innovation (cont.)

Part of innovation in accounting and auditing seeks to reimagine traditional processes w/ the goal of doing things: faster, better, cheaper Innovation embraces technology (when appropriate) to be more efficient and effective Innovation is YOU!: adaptive, able, ambitious, and creative

Ex. Work Paper

Section (From Appendix D): B Pen number: 186 and 187 Final Count(Using Machine Learning Software): 119 Head count per Pen Sheet (Appendix A): 125 Initial difference: -6 (Final count - Pen sheet) Reconciling items (Consider available information in Appendix A - E): 5 Explanation/ supporting document for reconciling items: The Pen Sheet asserts 125 cattle as of 4/15. Drone image supports 119 cattle as of 5/1. This results in an initial difference of 6 fewer cattle counted relative to the Pen Sheet. According to Appendix B, 5 of the cows were moved out of pen 186 and are in special pens. Three moved to hospital pens and two moved to pen 190. This results in a reconcile difference of 1 fewer than asserted by Pen Sheet. Final Reconciled difference (Column E Adjusted for Column F): -1 (Initial difference + Reconciling items) Questions for General Manager (Open questions the remain after consideration of Appendix A - E): 1 cow still not accounted for. Is there any additional evidence or information beyond Pen Sheet, Special Pen register and drone image that we should consider? Pen 187 not shown on map. Is there additional documentation that we should consider in regard to pen 187? Auditor's Initials Responsible for this row: TA Date Completed: 4/13/2021 Auditor's Initials that reviewed this row: ML Date Completed:4/13/2021

Takeaways

The pandemic is impacting every aspect of business and presenting challenges to auditors. - How is it impacting you job or clients? - Be prepared. Many challenges can be overcome w/ a willingness to adapt and through innovation With great challenges come great opportunities

BAA: Traditional counting process

The traditional method of counting sheep is to have shepherds and dogs herd them through a small gate and then have two people count the animals (the counters) as they pass through. The counters then compare their independent counts and negotiate a final count. When the difference in count is sufficiently large, a repeat count may be required. * This work is costly, lengthy, dangerous, risky, and difficult * Often results in an incorrect count

Traditional vs Innovative Audit Procedures

Traditional: - Junior staff not expected to do much analysis - Lengthy long process - Manual processes w/ hard copy ticking and tieing - Sampling - Audit viewed as only a commodity - Basic Excel only - Knowledge of accounting (and possibly finance) Innovative - All staff (including junior staff) are expected to provide analysis and more likely to interact w/ senior mgmt - Streamlined processes - Automated process (ETL) - Data analytics - Testing entire populations - Auditing and accounting viewed more as adding value and being innovative - Excel driven macros - Robotic process automation (RPA) - Machine learning - Artificial intelligence (AI) - Knowledge of accounting (and possibly finance)... plus STEM

WDB: Inventory Audit

WDB is interested in making the inventory count process less time-consuming and less stressful for the cattle. WDB also is interested in improving the accuracy of the inventory data, improving the timeliness of the reporting and having the process documented in a better manner. WDB is interested in understanding if using drone technology and automated counting software for the physical inventory count would be better than the traditional process.

Is this topic relevant?

What do you think and why? - Audit paradigm: audit evidence, efficiency, and effectiveness? - Advisory paradigm: client cost savings and inventory management? A possible response to current Audit Issues related to COVID-19? Given the unprecedented impacts of coronavirus, the audit process may be significantly altered: - Auditors may face time constraints in completing the audit, as well as challenges in obtaining and evaluating the sufficiency and appropriateness of audit evidence including; --> Limited availability of, or access to, company personnel (and client location) --> Delays by management in responding to auditor's inquiries; or --> Challenges in access to, or communicating with, other auditors Remote auditing

BAA: Using Machine Learning Software to Count within drone images

While capturing images of the inventory can improve the evidence for the inventory counts, this alone does not necessarily improve the efficiency of the inventory process. Thus, an important complement to capturing images is to automate the identification and counting of the items in the image. To automate the identification of items, several companies have developed automated counting using software. The software usually makes two types of mistakes - over identifying (Type I errors) or under identifying (Type II errors). Although it may be helpful, this software does not perform the count accurately enough for auditing purposes. At this time, humans cannot be eliminated from the current process. Specifically, human judgement is still required to review each count and to correct mistakes made by the software. The human correction of over and under identification provides feedback to the algorithm. This feedback improves the accuracy of the algorithm, and results in machine learning. Analyze the count of each image in this order: - Set the count area - Click the count button - Adjust the tag size - Manually review the accuracy - Take a closer look - Adj. count sensitivity - Repeat

Is it necessary for the auditor to be present at the time of an inventory count?

Yes! (but what does present mean???)

AS 2510: Auditing Inventories

https://pcaobus.org/oversight/standards/auditing-standards/details/AS2510 The auditor must be present to observe such counts as he deems necessary and must satisfy himself as to the effectiveness of the counting procedures used. Which assertion does an inventory count primarily provide supporting evidence for? - Existence - Valuation (Quantity x Price) - Rights (e.g., selling stuff on Amazon) - Presentation & Disclosure (FIFO vs LIFO)